In Thierry Lucas V HMRC [2020] TC07809, a salary bonus, forming part of a compromise agreement, was not found to be part of any termination payment.
- On leaving his employment, appellant and employer signed a compromise agreement, entitling him to a bonus of £500,000.
- The agreement did not include any compensation for loss of office.
- The appellant treated the payment as a Termination payment under s.401 ITEPA 2003 and as such qualified for full exemption under s.413 ITEPA 2003.
- HMRC raised an enquiry into the 2013-14 tax return which was followed by three Closure notices for 2014-15, 2015-16 and 2016-17.
- HMRC considered the payment to be general earnings which were earned in October 2011, in accordance with the appellant's employment contract.
- The earnings would qualify for Overseas workday relief.
- Closure notices had been issued by HMRC with errors of the tax liability.
- HMRC contended that the notices are not rendered invalid by these mistakes under TMA 1970; 'Want of form' or errors not to Invalidate assessments.
On appeal to the FTT it determined:
- Whether the closure notices were valid despite their admitted errors. The burden of proof lay with HMRC.
- Whether the payments received by the appellant were termination payments within s.401 or general earnings under ITEPA 2003. If earnings, then for which tax year? The burden of proof lay with the appellant.
The FTT decided that:
- The closure notices were valid despite the admitted errors.
- The compromise agreement preserved the appellant's bonus entitlement. Had the bonus been paid in the course of the appellants continued employment it would undoubtedly have been earnings from such employment. The nature of the wording within both contracts squarely makes the bonus payment fall within general earnings.
- Overseas workday relief would be available to the extent that they related to duties performed overseas.
- The bonus was earned in October 2011 and so the payment was for the tax year ended 5 April 2012.
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Termination, redundancy and leaving payments (to 5 April 2018)
This can be a difficult topic because employers often make leaving payments after considering employment law, without appreciating the tax consequences.
Termination, redundancy and leaving payments (from 6 April 2018)
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